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Breaking Down Your Business Model

Simply put, the business model is how you're going to make money. Think about how you can monetize your business idea. How much will people be willing to pay for your product or service? Survey the market if you're not sure. Look at your competitors' websites and even in their stores. Determine whether you will charge more or less for your product or service compared with theirs, and provide justification for this decision. Before anything, consider these five questions first:

Are you going to charge your customers a subscription or membership fee?

Will you charge a set fee for a given service or charge by the hour?

Will you sell a product outright? Will you sell ongoing and/or maintenance contracts?

Or will your business bring in revenue using a combination of these approaches?

The next four considerations are key because you have to assess how much it will cost to keep your business running. Think about numerically what profit margins would mean to you, how much it will cost to produce your product or run your service, what your overhead will entail and how much rent you'll be paying per month:

Making a Profit?

Making a profit is how your business is going to stay in business. You have to make sure that your revenue will be greater than your expenses – in other words, you'll need to generate a profit at some point. Most businesses take some time to become profitable. Now's the time to research and run some basic numbers. Determine how much will you be paying for estimated expenses: producing your product or service; paying rent, consultants, or employees; and other overhead? How many sales will you need to make to cover your costs of operating (otherwise referred to as your break-even sales)? For example, if you're selling a pet product for $10 and your monthly costs are $1,000, then you'll need to sell 100 pet products to cover your costs to break even. Any sales above 100 pet products could mean profit in your pocket.

Production

Determine whether you'll produce your product or outsource, or if you'll find a strategic partner to do it for you. For example, if you're selling the $10 pet product and you form a relationship with a manufacturer to produce it for you for $1, this means that you've outsourced production and are paying $1 or 10% of the $10 sales price.

Start-up Costs

Some businesses require less capital to get going – for example, a consulting service business. Other businesses require more capital to get going – for example a bakery or restaurant. The average start-up cost for a business in this country is about $70,000. Determine key items that you'll need to invest in to get your business idea going.

Business Location

Keeping costs low in the beginning is really critical, so think about whether you can run the business out of your home and operate it virtually. There are many low-cost technology solutions and a ton of free tools online if you only look. If you're operating a retail location or have special zoning requirements in your community, you may need to secure a lease for a business location. Make sure that the business location is appropriate for attracting customers and will maximize your opportunities for building the business. Consider these costs when you estimate your start-up costs; they can be significant.

Comments

I really like how this article starts, but I think it gets lost a quarter of the way through and this is really important for fuding considerations.
A business model is how you deliver the product or service. On the income statement it is calculated as SALES minus the COST OF GOODS. Note, this does not include marketing and certain operating expenses. Your business model is restricted to the efficient delivery of your product.
Blockbusters and Netflix sell the same product, however, Netflix gained market share because it had a more efficient mode of delivery. The more resource efficient your business model, the higher your gross margin which investors love.
So remember, when a banker or potential investor asks you to talk about your business model, they want to know what makes the delivery of your product more efficient, especially if your product isn't unique. Passion is one thing, but investors want to know there's good business sense behind your ideas.